The Securities and Exchange Board of India’s (Sebi’s) six-step plan to curb retail participation in speculative index derivatives may lead to a substantial drop in volumes — potentially by 30-40 per cent.
These measures aim to reduce excessive speculation in the futures and options (F&O) segment, where daily turnover often exceeds Rs 500 trillion and retail investors end up on the losing side of the trade more often.
Sebi has decided to increase the contract size from Rs 5 lakh to Rs 15 lakh, raising margin requirements and mandating the upfront collection of option premiums from buyers.
The new rules will also limit weekly expiries to one benchmark per exchange, bring intraday monitoring of position limits, and remove the calendar spread treatment on expiry days.
The steps are to increase the entry barrier for retail investors whose losses have been mounting, according to a recent study by the watchdog.
Analysts had estimated that the curbs may bring down the volumes on the National Stock Exchange (NSE) by nearly one-third. In September, the average daily trading volume for the NSE’s cash market segment stood at Rs 394 trillion, while that of the BSE was around Rs 144 trillion.
Besides the fresh derivatives curbs, futures trading volumes are also seen to be impacted on account of the increase in securities transaction tax, which came into effect from Tuesday.
Further, many expect the volumes to shift to the Gujarat International Finance Tec-City (GIFT City) in Gujarat, where GIFT Nifty contracts are traded on the NSE International Exchange (NSEIX).
“Limiting weekly expiries to a single index on the NSE and BSE could encourage a shift in trading volumes towards GIFT City, which still offers a wider range of weekly options.
"From a foreign portfolio investor perspective, this creates an attractive opportunity for those seeking flexibility in trading strategies,” said Rohit Agarwal, chief executive officer — funds business, Dovetail Capital.
“While the NSE remains the dominant player, averaging 10.8 billion equity derivatives contracts monthly in 2023-24, GIFT City, although growing, represents less than 1 per cent of the NSE’s volume with around 2 million contracts traded monthly.
"However, the transition will largely depend on how well GIFT City can build its liquidity and market depth to support this shift,” added Agarwal.
As far as onshore trading is concerned, the impact of the new measures on the BSE may be lower than on the NSE, given its relatively lower dependence on index options expiring through the week — which now will be limited to one.
Index derivatives trading accounts for a chunky portion of the revenues for both brokers and stock exchanges.
Zerodha, the largest broker in terms of profitability, has estimated a decline of 30-50 per cent in revenue owing to the changes.
Stockbrokers are planning to diversify their revenue streams to offset the hit on revenues.
The NSE’s income from transaction charges stood at Rs 3,623 crore in the first quarter of 2024-25.
The same for the BSE was Rs 366 crore.
A majority of this is contributed from the F&O segment and has surged on the back of heightened activity.
Three of the key measures by the market regulator will kick in from November 20, while others will be effective from February and April next year.
According to an earlier report by IIFL Securities on the NSE published in late August, Sebi’s decisions could dent the exchange’s revenues by 20-25 per cent.
The global trade body Futures Industry Association believes that while the intent of Sebi’s action is justified, the new measures could end up inflating the cost of trading.
“Liquidity providers could also face increased margin costs, leading to wider bid/ask spreads and creating market distortion.
"These higher spreads will ultimately be absorbed by retail traders, creating unintended additional costs for both retail and institutional investors,” it said in its submissions to Sebi’s consultation paper floated in July on derivatives curbs.
Higher entry barriers, some believe, may lead to some retail participants taking disproportionately higher risks.
A Sebi expert group is expected to monitor the impact of the proposed changes and go back to the drawing board in case more follow-up action is warranted.
